The economist realtors love to hate: David Madani stands by 2011 prediction of Canadian housing ‘day of reckoning’

David Madani is sticking to his guns, almost four years to the day that one of the most quoted bears on the housing market predicted as much as a 25% decline in prices.

“There will be a day of reckoning,” said the Canada economist of Capital Economics in an interview. Mr. Madani bills himself as independent of the mortgage and real estate industries and able to offer a clear view of the housing market. “Enjoy it while it lasts, that’s my response. Tell these real estate people just because it hasn’t happened, doesn’t mean it won’t.”

Phil Soper, chief executive of Royal LePage Real Estate Services Inc., can’t help but chuckle at the forecast now.

“They are a British firm seeking headlines for the last four years with the same end of the world prediction,” said Mr. Soper, adding prices will have to drop 45% for Capital Economics to be right once you factor in the 20% in price gains that have materialized since the 2011 call.

Mr. Madani is undeterred and waded back into the debate again Wednesday with a new economic note suggesting low-interest rates wouldn’t prevent a housing sales slump and diving prices, and even cautioned it could make his eventual doomsday scenario worse than he thought.

Enjoy it while it lasts, that’s my response

“While lower mortgage rates will help support home sales,” he said, referring to a few key regions, “we fear this will only result in greater imbalances in terms of housing overvaluation, household debt and overbuilding.”

This year will see a mere 2% decline in prices but over the long term he says nothing has changed from his original prediction that prices would fall by 25% – other than that call was made in 2011.

“It doesn’t make it wrong,” says Mr. Madani about the forecast. “All the conditions are still the same. We never put a specific timeline on it because we know it’s not a precise science trying to forecast this.”

He notes while people who bought in 2011 have experienced price appreciation in many markets, some who bought in the last year could find themselves under water very quickly in a major price correction. In a negative equity situation, those people might not even be able to renew their mortgages.

His original forecast said the eventual collapse of houses prices could even cripple the Canada Mortgage and Housing Corp., the Crown corporation that backs mortgages for consumers with less than a 20% downpayment in the event of default.

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“A sharp decline in house prices could lead to losses of around $10 billion, which would be enough to wipe out all of the CMHC equity,” he wrote in that original CMHC report.

Mr. Madani does say some things he didn’t anticipate have happened over the last four years which have propped up the housing market.

“First, market bond yields and mortgage rates declined. We expected these rates to rise moderately. Second, we thought tighter government regulatory measures on top of rising mortgage rates would more than cool the housing market. As it turns out, lower mortgage rates have effectively offset stricter mortgage rules. There has been no cooling effect in Vancouver and Toronto. Third, crude oil prices remained higher for longer than expected. We expected oil prices to decline moderately,” says the economist.

He adds oil prices are now the biggest threat to housing and not just in Alberta. “I don’t think other provinces will be spared completely. As the economic fallout from low oil prices spreads this year, weakness in the economy will hit housing markets more generally,” says Mr. Madani

So why stick to the forecast, in the face of criticism that is continually levelled against him by the real estate sector, many of whom want to know if he actually owns a home?

“We are sticking with this view because the fundamental analysis hasn’t changed: severe overvaluation, high household debt and overbuilding. If anything, the situation has become worse. So, the eventual housing correction could prove in the end to be somewhat deeper and more prolonged than we had originally feared,” he says.

A report from The McKinsey Global Institute Thursday pointed to Canadian consumer debt as unsustainable. Statistics Canada said debt reached a record 162.6% of disposable household income in the third quarter

As for the realtors who spit his name out, he says he gets it. “In every country that we make these calls, the real estate people are upset. That’s their business to sell homes,” says Mr. Madani, who is a little coy about whether he is actually a homeowner.

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